Negotiation Doesn’t Help on Dealer Car Loans for African Americans and Latinos


Center for Responsible Lending
January 23, 2014

African Americans and Latinos pay higher interest rates on dealer-financed car loans than white buyers, even though people of color report more attempts to negotiate a better deal. According to a new report issued today by the Center for Responsible Lending (CRL), 39% of Latinos and 32% of African Americans reported attempts to negotiate their interest rate, compared to only 22% of white respondents—yet buyers of color received higher interest rates.

The report, “Non-Negotiable: Negotiation Doesn’t Help African Americans and Latinos on Dealer-Financed Car Loans,” is based on information collected from 946 consumers in a detailed telephone survey conducted in October 2012. The results are consistent with longstanding findings of racial and ethnic discrimination in the auto lending industry.

While several studies have found pricing disparities on car loans even after controlling for credit risk, this is the first research on the impact of shopping habits, information received from car dealers, and disparities related to “add-on” products, such as high-priced insurance and warranties. The survey showed that the amount of comparison shopping for car loans was similar among all racial and ethnic groups, with African Americans and Latinos engaging in comparison shopping slightly less. Car buyers of color were much more likely to report receiving misleading information about their car loan, and they were nearly twice as likely as white consumers to be sold multiple add-on products.

The report discusses current dealer business practices and incentives that encourage discriminatory pricing on car loans, such as interest rate markups that car dealers then receive as compensation. These markups are hidden; consumers typically have no idea that dealers can add to their compensation by increasing interest rates. In addition, dealers also increase consumer costs by selling add-on products, like extended warranties, rustproofing and paint protection programs. The survey found that dealers sold African Americans and Latinos multiple add-ons 30% and 27% of the time, respectively, versus only 16% of the time for whites.

“As long as dealers can manipulate interest rates, car loans are a gamble for consumers,” said Chris Kukla, Senior Vice President of CRL. “Car buyers can do their best to negotiate, but they are at the mercy of dealers whose compensation is tied to hidden interest rate increases. That’s a formula for abuse.”

This report comes during a time when dealer-financed car loans are under intense regulatory scrutiny. Last March the Consumer Financial Protection Bureau (CFPB) reminded banks and other lenders that they are accountable for any discriminatory impact found in their auto loan portfolios. In December 2013, the CFPB and the Department of Justice (DoJ) agreed to a settlement with Ally Financial Inc. and Ally Bank in which Ally will pay $98 million in damages to consumers for potential violations of the Equal Credit Opportunity Act. The CFPB and DoJ found that African-American, Latino and Asian/Pacific Islander borrowers paid anywhere from 10 to 30 basis points more in interest than similarly-situated white borrowers, and that dealer markup was the likely cause.

CRL has called on regulators to end the practice of dealer markup, and prohibit compensation to dealers that is tied to the interest rate of the loan.

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For more information, contact David Beck at (919) 956-4495 or david.beck@self-help.org.

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About the Center for Responsible Lending

The Center for Responsible Lending is a nonprofit, nonpartisan research and policy organization dedicated to protecting homeownership and family wealth by working to eliminate abusive financial practices. CRL is affiliated with Self-Help, one of the nation's largest community development financial institutions.